A life estate is a form of joint ownership of real estate. It governs the length of time each owner has rights in the property and what those rights are. The person who holds the life estate is called the "life tenant" and has possession of the property during their lifetime. The co-owner, called the "remainderman," can take full ownership of the property after the life tenant's death.
A life estate can be used as a way to avoid probate but still provide the life tenant with a home for as long as they live.
What Is a Life Estate?
A life estate provides that the life tenant and the remainderman hold joint ownership of the property, but the remainderman has no right to possess it as long as the life tenant is alive.
A remainderman can take possession if the life tenant gives their express permission.
The life tenant obviously no longer has a say in how the property is treated after their death, or what the remainderman can do with it at that point in time. This is the case even if the life tenant attempts to restrict use or ownership after death through other means such as through a will or living trust. The life estate would prevail and take precedence over these estate plans.
How Does a Life Estate Work?
The life tenant is responsible for maintaining the property during their lifetime. They can improve upon it, but they can't encumber it by using it as collateral for a loan or mortgage and they can't sell it.
The property passes automatically to the remainderman upon the death of the life tenant by operation of law and the terms of the lease, so there's no need for probate. A life estate is similar to a joint tenancy with rights of survivorship in this respect.
Types of Life Estate Deeds
A life estate deed can be either traditional or enhanced. The enhanced version is often referred to as a "Lady Bird" deed. The significant difference between the two is that an enhanced life estate or Lady Bird deed allows the life tenant to borrow against the property or even sell it during their lifetime.
|Traditional Life Estate||Enhanced Life Estate|
|The life tenant has the right to occupy the property throughout their lifetime.||The life tenant has the right to occupy the property throughout their lifetime.|
|The life tenant can't sell the property or take a mortgage against it without the remainderman's consent,||The life tenant can sell the property or take a mortgage against it without the remainderman's consent,|
|The life tenant cannot revoke the deed.||The life tenant can revoke the deed.|
|Ownership of the property passes to the remainderman at the time of the life tenant's death.||Ownership of the property passes to the remainderman at the time of the life tenant's death.|
Disadvantages of a Life Estate
A life estate can solve lots of issues, but there can be downsides worth considering before you jump in:
- You must have the permission of the remainderman, and in most states, the spouse of the remainderman, before you can sell the property or use it as collateral for a mortgage or loan.
- You might also be limited in the type of financing you can get on the property.
- You can't revoke or amend the life estate deed if you later change your mind about it, at least not without the cooperation and consent of the remainderman.
- The remainderman's creditors can place a lien against the property, but they can’t force you to give up your life tenant rights. You would have to pay off the lien, however, if you and your remainderman sell the property.
- A life estate affords you few protections if your remainderman files for bankruptcy or goes through a divorce.
- Your remainderman's heirs will become the remaindermen if the remainderman predeceases you.
- A life estate doesn't protect a property from foreclosure.
Life Estates and Medicaid
Medicaid is a safety net entitlement program, so it has strict rules governing how much you can own if you want to take advantage of the program.
Medicaid can be a lifeline for some people when and if they must move into a nursing facility. Many people don’t have the ready cash available to move into a facility if they need long-term care, and Medicaid steps in to provide this.
Owning a home is usually enough to either disqualify you from Medicaid eligibility, or the property might be subjected to Medicaid liens that would allow Medicaid to recoup some or all of the benefits it provided to you. But the house won't count against your assets in assessing your eligibility if you transfer the property to a trusted friend or relative and retain a life estate in it for at least five years.
How to Create a Life Estate
Setting up a life estate is generally much easier and less expensive than creating a living trust. It's really a very simple matter of creating the appropriate deed, but it has a good many legal ramifications so you might want to enlist the help of a local attorney to be sure you get it just right.
The exact requirements and legal provisions for creating a life estate can vary a little between states, and this is another good reason to at least consult with a local attorney.
You might also want to make an honest assessment of why you think a life estate would be a good idea doe you. You might want to consider a life estate if:
- You want to transfer the property but retain access during your lifetime.
- You want some measure of certainty as to who gets the property at your death.
- You think you might need to use Medicaid to go into a nursing home after five years have passed, and you want to avoid Medicaid liens on the property.
- A life estate is similar to a joint tenancy with rights of survivorship in that two or more people own the property and it passes to the survivors at death without the need for probate.
- Unlike other forms of deeds and most estate plans, a life estate cannot be undone or revoked later if you change your mind.
- A life estate provides that you can live in the home for as long as you live, but you can’t sell or place a mortgage against it without the consent of your co-owners.
- A traditional life estate deed is different from an enhanced life estate deed, which would allow you to sell or mortgage the property without consent.